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PACE for Residential and Commercial Renewable Energy Projects—What is it?

“PACE” – Is it the new buzzword? Lately, it seems I keep hearing about securitizations backed by PACE financings. What is a PACE financing program, and what is happening in the securitization market?

“PACE” stands for Property Assessed Clean Energy. Under PACE programs, municipalities and counties form special tax districts to help residential, commercial or industrial property owners finance energy efficient upgrades or renewable energy installations to their properties through payments of additional property taxes. While the specific details vary by state, the basic premise is that the property owner is allowed to finance 100 percent of the cost of the energy property through increased property tax assessments – the “PACE” assessments. The PACE assessments are typically for 15 to 20 years and operate similar to loan payments in that these property tax payments repay the initial financing cost for the energy upgrade. The PACE assessments, however, are legally property tax assessments and, thus, have the benefit of being secured by senior liens against the taxpayer’s property.

The way the financing works is specific to the individual programs, but the funds typically come from some form of private / public partnership, which allows the state or municipality to encourage identified property upgrades to achieve environmental and energy efficiency goals without having to raise funding, and provides investors with new opportunities to invest in a secure asset in the green energy space. The benefit to the property owner is typically the ability to realize immediate cost savings in reduced energy costs while paying for the improvement over a 15 to 20 year period, and also being able to finance 100 percent of the cost.

Currently, 19 states and the District of Columbia have actively operating PACE programs, and there is active PACE-enabling legislation to launch and operate programs in another 24 states. There are residential PACE programs in California, Florida, and Missouri. In a residential program, such as for solar panels, the PACE assessment would typically remain with the home when it is sold and the new owner would become liable for the payments following a sale.

Bonds associated with PACE assessments first began being packaged and securitized in March 6, 2014. This first deal was a $104 million issuance that was backed by a PACE program involving a portfolio of residential solar systems. The note was rated AA by Kroll, had an 11-year duration and an interest rate of 4.75 percent (as compared to the eight percent interest rate on the underlying PACE obligation). The advance rate was 97 percent.

On September 22, 2016, this same issuer completed the eighth securitization of its PACE residential program.

Reporting on several PACE securitizations near the end of 2016, Greentech Media commented that PACE financing is “growing at a formidable clip, with large securitizations coming in more regular succession.”

In November 2016, the Department of Energy (the “DOE”) released guidance for PACE residential programs in the form of baseline best practice guidelines to help state and local governments, PACE program administrators, contractors, and other partners develop and implement programs and improvements that effectively deliver home energy and related upgrades. The guidelines include recommendations for protections to be included in the programs to protect consumers, as well as for lenders that hold mortgages on properties with PACE assessments.